Založení investiční společnosti

Why a standard LLC is not enough for asset management: The risk of "unlicensed funds"

As soon as you start gathering funds from third parties for the purpose of joint investment (so-called collective investment), you enter territory strictly regulated by the Czech National Bank. The entire framework is determined by the Act on Investment Companies and Investment Funds (ZISIF). It clearly states that a special permit is required for such activity. Attempting to bypass this obligation is extremely risky.

The CNB actively monitors the market and regularly warns against the activities of so-called "unlicensed funds". If you manage assets without a license, you face penalties for unauthorized business on the capital market of up to CZK 150,000,000, and the CNB can petition the court to dissolve your company.

At ARROWS, our Czech legal team regularly performs legal analyses of existing corporate structures to identify hidden regulatory risks. Do you want to be sure that your current asset management does not violate the law? Write to us at consultation@arws.cz.

Who is Who? Investment Company, Fund, and CNB Supervision

Before you start planning, it is crucial to understand the key players in this ecosystem. The structure of your future business will depend on your choice. An investment company is a legal entity based in the Czech Republic that holds a CNB license to manage assets in investment funds. It is the "brain" of the entire operation, making investment decisions and managing risks. The investment fund itself is the "envelope" for the assets. It can be "non-self-managed", meaning it is fully in the care of an investment company. The alternative is a "self-managed investment fund", which obtains its own CNB license and manages, and potentially administers, itself.

The CNB's role does not end with granting the license. It is an active supervisory authority that monitors your activities, requires regular reporting, and protects investors' interests. Choosing between a self-managed fund and a structure with a separate investment company and fund is a key strategic decision. It affects the amount of capital, organizational complexity, and the level of liability.

We will help you design an optimal and cost-effective structure for your investment plan. Contact us at consultation@arws.cz to get a tailored legal solution.

Licensing Proceedings with the CNB: Three Pillars of Your Application

Obtaining a permit from the CNB is a time-consuming and administratively demanding process. Your application must stand on three solid pillars. Any error in one of them can lead to delays or rejection.

1. Initial Capital and Financial Health

You must prove to the CNB that you are financially stable. This includes demonstrating a minimum initial capital, which varies depending on the type of license. For a self-managed investment fund, we are talking about amounts in the hundreds of thousands of EUR; for funds of qualified investors, the fund capital requirement can reach up to EUR 1,250,000. It is also crucial to transparently document the origin of these funds.

2. Company Management and "Fit and Proper"

The regulator places immense emphasis on who will manage the company. Every executive officer (managing director, board member, director, or other person who actually manages the company's activities) must meet strict "Fit and Proper" requirements. This means demonstrating trustworthiness (clean criminal record, business integrity) and professional competence (sufficient education and relevant experience in the field). Importantly, an executive officer of an investment company or a self-managed fund must have the prior consent of the CNB to perform their duties (Section 515 of ZISIF) – without this consent, they cannot perform the function, and a high fine may be imposed.

3. Business Plan and Organizational Structure

It is not enough to just have capital and people. You must submit a detailed business plan, realistic financial predictions, and, above all, a robust organizational structure to the CNB. You must prove that you have functional internal processes in place – a risk management system, internal control, compliance procedures, AML policies, and rules for dealing with investors.

The lawyers at ARROWS have extensive experience representing clients in licensing proceedings before the CNB. We will prepare complete documentation for your permit application, including the business plan and internal processes setup, to ensure a smooth and fast process. For an immediate solution to your situation, write to us at consultation@arws.cz.

Most Common Mistakes in Licensing Proceedings

From our experience, we know that the process often fails due to administrative errors and underestimating the details required by the CNB methodology.

Obtaining a License is Just the Beginning: Why a Compliance Program is Key?

Many applicants mistakenly believe that all administration ends once the license is obtained. The opposite is true. By obtaining a license, you become a regulated entity under the continuous supervision of the CNB. Therefore, it is absolutely essential to have a functional compliance program in place from day one. This is a system of internal rules and control mechanisms (especially AML, risk management, reporting) that ensures ongoing compliance of your activities with the law.

However, this program has another crucial significance that many directors do not realize: protection against the criminal liability of legal entities (under Czech legislation, specifically the TOPO Act). If criminal activity occurs within your company (e.g., an employee's failure in AML), a functional and demonstrably enforced compliance program is what can exculpate the company and its management from criminal liability (Section 8, Paragraph 5 of Act No. 418/2011 Coll.); this option does not apply to the individual criminal liability of management members.

How ARROWS Sets Up Compliance That Protects You

Compliance from ARROWS is not just a binder full of papers in your cabinet. We focus on practical and functional solutions that protect your business without paralyzing it.

Not Just Theory, but Practice

We understand that your primary activity is investing, not administration. Therefore, our lawyers actively help with the implementation of all regulatory obligations. This includes drafting internal policies tailored to your business – from AML/CFT rules and risk management to investor protection rules.

We also prepare documentation to protect against penalties. This involves, for example, auditing and reviewing contracts, investment questionnaires, and marketing materials to prevent the risk of so-called misselling (selling unsuitable products to clients). A key component of functional compliance is professional training for employees and management. We provide certified training sessions that serve as crucial evidence of prevention during a potential CNB inspection or in criminal liability proceedings.

Our Czech legal team specializes in compliance in regulated sectors. We provide long-term legal support and audits for our clients, including more than 150 joint-stock companies and 250 LLCs. Do you need to set up functional compliance? Write to us at consultation@arws.cz.

CNB Penalties and Reporting Errors: Overview of Risks

In recent years, the CNB has tightened its supervision and does not hesitate to impose significant sanctions. It is not just about extreme cases of serious and repeated AML failures, for which the law allows fines exceeding CZK 10 million. A major risk is also posed by seemingly minor administrative tasks, such as regular reporting. Regulated entities must submit a number of reports (e.g., ROFOS) to the CNB.

Neglecting reporting, even if the fund has not carried out any activity (a so-called zero report), is considered an offense. This leads to fines and, above all, to unwanted attention from the regulator, who will "flag" you for future inspections.

Operational Risks and Penalties After Launch

Granting the license is just the starting line. During operations, you must face risks that can seriously threaten your license and reputation.

Expansion into the EU? The Power of the ARROWS International Network

Establishing a fund in the Czech Republic is often just the first step. The logical continuation of the business is offering investments in other EU countries, such as Poland, Slovakia, or Germany. This process, known as "passporting", is also strictly regulated; under Czech legislation, the law also separately regulates so-called pre-marketing (Section 297a of the ZISIF Act), i.e., verifying investor interest before the actual offering.

It is not automatic. You must first notify the CNB of your intention (so-called notification obligation), which then communicates with the foreign regulator. This process requires careful preparation of documentation and a business activity plan in the respective country.

We handle this agenda for our clients practically every day. Our Prague-based legal team will help you prepare the notification documentation and manage the entire process with the CNB. Are you planning to expand? Contact us at consultation@arws.cz.

Conclusion: We Are Not Just Lawyers. We Are Your Business Partner.

Establishing an investment company is a complex project that requires not only legal precision but also business insight. At ARROWS, we understand both. Our experience in providing long-term legal care to more than 150 joint-stock companies and 250 LLCs gives us a detailed insight into the needs of companies at all stages of their growth.

We pride ourselves on speed and the high quality of our legal services. But our work does not end with paragraphs. At the same time, we actively connect our clients if they have interesting investment or business opportunities. We would also love to hear your business idea. Are you looking for a partner who understands both the strict regulations of the capital market and your business? Do not hesitate to contact our office – consultation@arws.cz.